Family Law

Living In a Community Property State

Yes, Arizona is a community property state. There are a total of nine community property states in the U.S. The other 41 follow the common law, and are sometimes called “equitable distribution” states.

The 9 community property states are: Arizona, California, New Mexico, Texas, Idaho, Louisiana, Nevada, Washington, and Wisconsin. In Alaska, a couple getting married can opt to have their property treated as community property, or the couple can opt to adopt common law principles. Community property law derives from the legal system of old Spain. Back in the 1700s and early 1800s, Spain owned the territory that is now California and the southwestern U.S. As a result, these areas followed Spanish law. By the time California and the southwestern territories became states, community property was the established law, and never changed. In fact, several other states adopted community property law, believing it to be the most fair method for dividing marital assets.

How Community Property States and Common Law States Differ

Okay, Arizona has community property law, but what does that mean? How does it differ from the common law the majority of states follow? Basically, in a community property state, all property acquired during marriage is presumed to belong to the marital community. Both husband and wife have an equal right to the property. The title on the vehicle or name on the bank account doesn’t matter. Which spouse earned the money doesn’t matter. Everything accumulated during the marriage belongs to both parties and will be split equally during a divorce. There are a few exceptions to the rule, and those will be discussed later.

In an equitable distribution or common law state, assets belong to the spouse whose name appears on the deed, title or account. Earnings belong to the spouse earing the income. In a divorce, the court will divide the property acquired during marriage “equitably.” That could be a 50/50 split, but often it isn’t. When a couple divorces in a common law state, the court considers various factors in deciding how to split the couple’s assets. They look at the length of the marriage, the age and health of the parties, the income and future earning capacity of both parties, whether one party contributed to the spouse’s education, and several other factors.

Here are some examples of how the result can differ with the two types of law. Dan and Joan have been married for 15 years. Prior to marriage, they were two college kids with no assets. They have no children, and Dan just filed for divorce. Joan teaches a pre-kindergarten class and earns $33,000.00 per year. Dan designs computer games. The first two years of the marriage, the couple relied on Joan’s income while Dan started the business. Now, Dan’s business is worth $2.5 Million Dollars. The business is in his name. The couple own a house in joint tenancy, an expensive motorhome, and two Mercedes automobiles. All the vehicles are in Dan’s name.

In a community property state, Joan will be awarded half of everything – the house, the business and the three vehicles. All bank and investment accounts will be divided equally. That’s because all the assets the couple own are community assets. All their property was acquired during the marriage. The result could be very different in a common law state. The common law presumes that the business, the motorhome and both cars belong to Dan because everything is in Dan’s name. Joan will be awarded half of the house because it is a joint asset, but the judge could decide that the business belongs to Dan and order Dan to pay her a small sum as her equitable share.

The Devil is in the Details

We have generally discussed what community property is. Now, let’s talk about what it isn’t. All property acquired before the marriage is the sole and separate property of the spouse who acquired it. Arizona has a statute defining separate property. A.R.S. § 25-213 states: “A spouse’s real and personal property that is owned by that spouse before marriage and that is acquired by that spouse during the marriage by gift, devise or descent, and the increase, rents, issues and profits of that property, is the separate property of that spouse.” In other words, if you owned a house before you were married and you rent out that house through a property management company, the rents and house are both your separate property.

But, that can change. Here are some examples: Mary rents out a house she owned before she was married, but Mary puts the rent money in a joint account with her husband. Is the rent money still her separate property? No. By placing the money in a joint account, Mary has converted the rent money to a community asset. Another example: Susan purchased a house one year before her marriage to Tom. Now, ten years later, the couple are divorcing. During that ten years, the couple lived in the house, and community income paid the mortgage payments. That means Tom has a community property interest in one half of the equity created by those mortgage payments. Susan may need to buy him out after the divorce.

As mentioned earlier, property the spouse owned when he or she entered the marriage is that person’s sole and separate property. Money or property that is a gift or an inheritance is also separate property. It is owned by the spouse receiving the inheritance. If Susan’s mother died and left her an antique clock worth $10,000.00, that clock remains Susan’s separate property. Tom has no claim on it in a divorce. However, if Susan inherits $10,000.00 in cash and puts it in her joint savings account with Tom, it is converted to community property. This is the reason lawyers usually caution people embarking on a second marriage to avoid mingling their separate property with community income or assets.

What happens if a couple moves from a common law state to Arizona? That question is also answered by Arizona Statute. A.R.S.§ 25-217 states: “Marital rights in property which is acquired in this state during marriage by persons married without the state who move into the state shall be controlled by the laws of this state.” If a couple moved from Ohio to Arizona, sold the Ohio house owned by the husband, and used the proceeds to buy a motorhome in Arizona, the motorhome will be community property, owned equally by both spouses.

Another interesting tidbit about community property law is that it takes both spouses to buy or sell real estate. It also requires the signature of both spouses to guarantee someone else’s loan or to sign an indemnity contract. You can’t guarantee your son’s car loan without the signature of your spouse. You can’t sell your vacation home without your including your spouse on the deal. However, those protections afforded by community property law do not prevent one spouse from running up big credit card debts without the other knowing. Other than real estate, loan guarantees, indemnity contracts and surety contracts, each spouse has an equal right to manage the community debts and assets. When one spouse incurs a debt, it binds both parties to the marriage.

Love it or hate it, Arizona is a community property state, and that isn’t going to change any time soon. If you are married or contemplating marriage, it is a good idea to learn a little about community property law.

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